OTTAWA (Reuters) - Canadian and Mexican officials will meet on Wednesday to discuss how to handle negotiations on NAFTA, two well-placed sources said on Tuesday, as a top Canadian diplomat hinted at a potential clash with Washington.

The working-level talks are scheduled to take place in Ottawa, said the sources, who asked to remain anonymous given the sensitivity of the situation.

"The two sides will be looking for areas where they can work together," said one of the sources.

The meeting was scheduled before the United States on Monday released its goals for negotiations to update the North American Free Trade (NAFTA), which came into force in 1994.

Washington's wish list contains potentially contentious items such as cutting the U.S. trade deficit with Mexico and Canada, boosting enforcement of labor standards and eliminating a trade dispute mechanism -- all of which will be discussed by the Canadian and Mexican delegations, said one source.

Earlier on Tuesday, Canada's ambassador to Washington said it was critical for NAFTA to have a dispute resolution mechanism.

The administration of U.S. President Donald Trump wants to ditch the Chapter 19 mechanism that has hindered the United States from pursuing anti-dumping and anti-subsidy cases against Mexican and Canadian firms.

"There are many things they raised where we take quite a different position. We think it's critical to have some kind of a dispute resolution mechanism incorporated -- it was in 1994 and it continues to be," said envoy David MacNaughton.

"Whether or not ... (it) can be improved or modernized, I think we're up for discussion on that," he said in televised remarks to reporters in Edmonton, Alberta.

Under Chapter 19, which Canada insisted be in NAFTA, binational panels hear complaints about illegal subsidies and dumping and then issue binding decisions. The United States has frequently lost such cases.

MacNaughton said he was not particularly surprised by the U.S. demands, many of which had been flagged ahead of time.

Both Mexico and the United States face important elections in 2018 which could complicate the negotiations.

Mexico says it would make sense to wrap up the talks by the end of this year, a goal Canadian officials say privately is impossible if the agreement is to be properly updated.

"If we could get a clarification of the trading relationship sooner rather than later it would be better, but ... we're not going to rush into a bad deal," said MacNaughton.